FTSE Russell Discussion on Fixed Income Indexes CFIF Committee Meeting

Transcription

1 FTSE Russell Discussion on Fixed Income Indexes CFIF Committee Meeting ftserussell.com October 3, 2017 FTSE Russell 1

2 Disclaimer FTSE Russell is not an investment firm and this presentation is not advice about any investment activity. None of the information in this presentation or reference to a FTSE, FTSE TMX, or FTSE Russell index constitutes an offer to buy or sell, or a promotion of, a security. This presentation is solely for informational purposes. Accordingly, nothing contained in this presentation is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of making any investment through our indexes. FTSE Russell 2

3 Discussion Topics 1 FTSE Russell Fixed Income Developments FTSE TMX Canada Evolution - Brief History and Product Overview Expanding FTSE Russell Fixed Income Capabilities 2 Global Regulatory Developments 3 Approach to Indexing Overview of Indices tracking Canadian Fixed Income FTSE TMX Canada Universe Bond Index IOSCO Objectives, Considerations and Oversight Governance and Committee Structure 4 Bond Price Methodology Overview of Multi Dealer Pricing Methodology Price Challenge Policy 5 Appendix Regulatory Changes in Index Landscape FTSE Russell 3

4 FTSE Russell Fixed Income Developments FTSE Russell 4

5 FTSE Russell 5

6 FTSE TMX Canada Products FTSE offers comprehensive, transparent broad market and alternative strategy Benchmark Indices in Canada, overseen by a rigorous Governance Framework, provides Bond Pricing utilizing a Multi Dealer Methodology, and supports both through market risk and performance Analytics Indexes Bond Pricing Analytics FTSE TMX Canada FastQuote FTSE Bond Analytics (PCBond) BondPerform Index Families covering a multitude of asset categories and debt types 600+ index series across 20+ index families Multi Dealer Pricing Methodology gathers contributions from primary dealer brokers and anchors in traded price to create an official market composite FTSE Bond - Comprehensive Portfolio & Benchmark Management software to evaluate market risk and identify opportunities Transparent Rules Based Methodology Classification and Rating Schemes Modular Index Constructions Consistent pricing approach provides transparency and price discovery to an opaque OTC market Three powerful programs BondMan, BondCalc, BondData access one of the largest Fixed Income databases with over 70 years of history on indexes, prices, and bond reference date Innovative development of leading Market Index &Alternatively Weighted Benchmarks Custom & Bespoke Index solutions to support Asset Owners, Money Managers & ETP Issuers Overarching Governance Framework to oversee index in line with global standards external Advisory Committees to support benchmark development and design IOSCO Compliant Official 4 pm EST end of day market close valuations are available for in and out of benchmark bonds Valuations are used to price the indexes and are distributed to buy side participants (Mutual Funds, Custody, Asset Owners) to price portfolios and strike NAV BondPerform Factor Based Performance Attribution system decomposes daily returns of benchmark and portfolio Support Guide Interactive on-line support facility, offering user on-boarding guides, training materials, guided help, technical FAQ and much more Support by experienced analysts FTSE Russell 6

7 Development of the FTSE TMX Canada Suite FTSE Russell are committed to ensuring the integrity and quality of the benchmarks Overall strategy in Fixed Income values the deep domestic benchmarks in complement to growing the Global footprint and coverage FTSE Russell bring global context along side local market expertise to deliver best in class products FTSE Russell is investing and adding resources to the FTSE TMX Canada suite of products to support and drive a number of development initiatives FTSE Russell INTERNAL USE ONLY 7

8 Citi Yield Book and Fixed Income Index Acquisition LSEG announced its acquisition of The Yield Book analytics platform and Citi Fixed Income Indices from Citi in May and completed the acquisition on 31 August 2017 Citi Fixed Income Indices provide comprehensive coverage of global debt markets The Yield Book s products offer analytical insights into a broad array of fixed income instruments with specific focus on mortgage, government, corporate and derivative securities The FTSE TMX Canada product suite complements the Citi offering and remains a core component of FTSE Russell s benchmark development strategy for fixed income FTSE Russell INTERNAL USE ONLY 8

9 FTSE Combined Fixed Income Family FTSE Fixed Income Global, Regional, and Local Indices Global Regional Domestic/Partnership Global Americas EMEA APAC and Japan Emerging Markets World Government Bond Index (WGBI) US Broad IG Bond Index (USBIG) Euro Broad IG Bond Index (EuroBIG) Asian Government Bond Index (AGBI) Emerging Markets Government Bond Index (EMGBI) World Broad IG Bond Index (WorldBIG) US High-Yield Index European High-Yield Market Index Asian Broad Bond Index (ABBI) Emerging Markets Broad Bond Index (EMUSDBBI) World Inflation-Linked Securities Index (WorldILSI) Sukuk Index World Money Market Indices (WMM) US Treasury STRIPS Latin American Government Bond Index (LATAMGBI) Eurobond Index Central Eastern Europe, Middle East, and Africa Govt Bond Index (CEEMEAGBI) Middle East and North Africa Broad Bond Index (MENABBI) Dim Sum (Offshore CNY) Bond Index Chinese Government and Policy Bank Bond Index (CNGPBI) China Onshore Broad Index (CNYBBI) Emerging Markets Inflation-Linked Securities Index (EMILSI) Emerging Markets US Dollar Government Bond Index (EMUSDGBI) FTSE TMX Canada Index Series FTSE MTS Index Series China Onshore Broad Index (CNYBBI - Interbank) Alternative Weight Analytics Duration (OAD, Key Rates) Spreads (OAS, OASD) Yield (YTM, YTC, YTW) Convexity Multi-Sector (Universe, Maple, HY, Converts) Government (real return, nominal, bills, provies) FTSE PiP Index Series Government (Eurozone nominal, linkers and bills) Covered FTSE Actuaries UK Gilt Index Series FTSE SBI (India) Index Series Australia Broad IG Bond Index (AusBIG) Debt Capacity World Government Bond Index (DCWGBI) Citi RAFI Bond Index Series Time-Weighted US Fallen Angel Bond Index FTSE Russell 9

10 FTSE Fixed Income Benchmark Index Overview The Four Pillars Global Footprint, Domestic Partnerships Capturing global fixed income in broad indices, coupled with local market partnerships to provide depth in domestic fixed income Index & Analytics Differentiated Core Offering Thematic Innovation Rich Analytical Framework Custom Index Solutions Scalable and extensive custom solutions, for both global and local markets. Robust Control & Governance Framework Ongoing continuous product improvement through governance and independent oversight FTSE Russell 10

11 Global Regulatory Developments FTSE Russell 11

12 European Benchmark Regulation Changes in regulatory landscape require index providers to meet higher standards in control, governance, and oversight as Benchmark Administrators European Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the EU BMR) will apply from 1 January 2018 EU BMR introduces a common framework to ensure the accuracy and integrity of indices used as benchmarks in the European Union FTSE Russell fully supports the focus of the EU BMR, has been involved in contributing to its formation, and is committed to ensuring compliance of its relevant benchmarks with the EU BMR Please refer to Appendix for additional details on EU BMR FTSE Russell 12

13 Approach to Indexing FTSE Russell 13

14 IOSCO Statement of Compliance FTSE Russell publishes a Statement of Compliance with respect to the recommendations made by the International Organization of Securities Commissions (IOSCO) in Principles for Financial Benchmarks Final Report (the IOSCO Principles) Independent assurance of the assertions by FTSE Russell in its Statement of Compliance has been received from KPMG LLP FTSE Russell embraces and endorse the IOSCO Principles and adhere to the standards for benchmark administrators, set out by IOSCO in the areas Governance Quality of the Benchmark and Methodology Accountability For FTSE TMX Canada, report covers the Universe Bond Index benchmark and the pricing used to strike the index The highlights and the full FTSE Russell report are publicly available at the following FTSE Russell 14

15 FTSE TMX Canada Benchmarks Track Multiple Market Segments in Domestic Fixed Income Broad range of security types Broad Market Broad Market Sub Indexes Alternative Strategies Universe Bond Index Money Market Index Series Corporate Bond Index Laddered Bond Index Series) Maple Bond Index Floating Rate Note Index Government Bond Index Liquid Bond Index Series Universe + Maple Bond Index Strip Bond Index Sector Sub Indexes multiple, for each Corporate and Government sector Target Maturity Bond Index Series Real Return Bond Index 20 + Bond Index Term Sub Indexes Short, Mid, Long, 1-3 y, 3-5 y, 7-10y, 10-15y, 15-25y, 25+ HYBrid Bond Index High Yield Bond Index Convertible Bond Index Quality Sub Indexes Corporate AAA/AA, Corporate A, Corporate BBB Discount Bond Index Pricing Bonds are priced using the Multi Dealer Pricing Methodology Analytics Risk and Performance Yield, Duration (Mod, Mac) Convexity, DVal01 Sector, Rating, Term Breakdowns Governance IOSCO Compliant Overseen by internal Governance Board and External Advisory Committees FTSE Russell 15

16 Rules Based Transparent Methodologies In line with governance standards, FTSE TMX maintains transparent, robust, rulesdriven index construction methodologies Methodologies are publicly available and contain eligibility, exclusion, handling and calculation attributes Category Summary of Current Rules FTSE TMX Canada Universe Bond Index Market Coverage Domestic (Canadian) Government and Corporate issuers, in Canada in C$ Min Issue Size Quality Term Coupon Additional Screen Other Inclusion Clarification Exclusion Clarification Government Bonds: $50mn / Corporate Bonds: $100 MM Adjusted to reflect buybacks, BoC holdings, stripping / reconstitution Investment Grade; Index Rating of BBB or higher Securities must have at least one year to maturity Fixed-rate, semi-annual pay securities At least 10 institutional buyers at issue (independent compliance certificate) Clarification to include NVCC, callable, extendible/ retractable, sinking funds, exchangeables, junior subordinated bonds/hybrid capital, fixed-to-floaters, semiannual amortizing securities, semi-annual bullet ABS Does not include floating-rate notes, convertible bonds, CMBS,MBS, other monthly-pay, pre-payable, or inflation-indexed securities, securities specifically targeted to the retail market or securities that are not priced FTSE Russell 16

17 Index Control and Governance Framework FTSE Russell leads global best practice standards in governance, including those applied to FTSE TMX Canada, with a focus on transparent, robust and rules-driven index construction Index construction, management, and methodology evolution are overseen by an overarching governance structure which includes Internal Governance Board External Advisory Committees Market Consultations Index developments are communicated to the market to inform participants FTSE Russell 17

18 Effective Governance FTSE Russell Internal Committees FTSE Russell External Committees Governance Board Working Committees FTSE Russell Advisory Board FTSE Partnership Committees Ultimate authority Approves all new products and changes to existing products Ensures products are maintained in accordance with their rules and guidelines Ensures controls and procedures for index management are effective SEAG MAPI IMG Agrees treatment of difficult & potentially contentious corporate events Forges consensus on changes to processes and procedures Reviews all proposed rule changes prior to GB approval FTSE Russell Regional Committees FTSE Nationality Committee FTSE Country Classification Committee Committees consist of leading market professionals from around the globe, including asset owners, consultants, investment managers and financial analysts Independent oversight of our indexes is central to our approach to doing business FTSE Bond Index Committees FTSE Russell 18

19 Index Control and Governance Framework FTSE Russell Internal Governance Board (GB) Operated through working groups of senior, knowledgeable and experienced professionals across governance, research, and operations areas Governance Board is responsible for maintaining the integrity of the indexes through regular review and approvals of any index methodology changes, quality of inputs and analytics, product development, as well as technical and operational robustness For FTSE TMX Canada Indexes this process also includes Review of Submissions Undertaken regularly throughout the year Comparison with corroborating data Review of satisfactory operation of the index in light of market conditions FTSE Russell 19

20 Index Control and Governance Framework FTSE Russell External Advisory Committees Formed of senior experienced market practitioners serving in a personal capacity, including but not limited to: asset owners, asset managers and consultants The independent committee structure supports the Governance Board by Helping to ensure that indexes reflect their underlying market (representative) Methodology (a strict set of rules by which all FTSE Russell indexes are governed) evolve in line with the highest standards of the industry to take account of changing market dynamics Ensure that the indexes are managed and calculated according to the Index Methodology, and remain transparent and accurate Committee discussions are minuted, and a high level summary of the Public Minutes is available for access at FTSE Russell 20

21 Index Control and Governance Framework Market Consultations FTSE Russell regularly consults the market to provide guidance on various topics: Representativeness of indices to continue to meet index users requirements Coverage of new issuance types Interpretation of index rules in light of market events/developments Evolution of index methodology to ensure benchmarks meet objectives Feedback is gathered through a number of channels including formal consultations and surveys, ongoing dialogue with market participants and the Advisory Committee Engagement with market participants include buy side and sell side firms; asset owners and consultants; issuers and syndicates; and regulatory agencies Consultation feedback and survey results are non-binding and ultimate decision making authority belongs to FTSE Russell FTSE Russell 21

22 FTSE TMX Canada Bond Pricing Methodology FTSE Russell 22

23 Multi Dealer Pricing Methodology Overview FTSE TMX Canada Multi Dealer Pricing Methodology Guide publicly available to all users at The Guide specifies the following logic Contributors provide quotes according to market conditions FTSE TMX price verification process compares the contributions against several verifications such as pricing from the lead dealer (if such exists), contributions from other dealers, and traded prices (if such are reported) Contributions that pass these tests but lie more than one standard deviation from the mean are excluded Those remaining are averaged to form the blended price The blended price is further checked against the nearest maturing Canada benchmark bond for consistency in price and yield movements from the previous day Price challenge policy and process allows for users to challenge and validate levels FTSE Russell 23

24 Multi Dealer Pricing Contributors The FTSE TMX receives bond pricing contributions from the following Canadian dealers (listed alphabetically) BMO Nesbitt Burns Casgrain & Company CIBC World Markets Desjardins Securities Laurentian Bank Securities Merrill Lynch Canada National Bank Financial Scotia Capital RBC Dominion Securities TD Securities FTSE Russell 24

25 Anchoring Multi Dealer Pricing Methodology Price Verification Scrub mechanisms aim to remove stale or off-market prices which could possibly distort the final price. The scrub mechanisms: utilize the database, by reviewing historical volatilities of daily yields; review the lead dealer pricing; review trade data (CDS, for trades with min size of $500k) to identify contributions most in line with recent trades; compare Dealer to Dealer valuations for each instrument FTSE Russell 25

26 Multi Dealer Pricing Methodology Final Blend Standard Deviation Mean Once passed through the validation and price verification screens, the remaining contributions are included in the Standard Deviation Mean calculation Quotes are used to calculate the mean and standard deviation of the remaining data set Prices falling above or below one standard deviation of the mean are eliminated The final price is derived as the mean (average) of the remaining quotes FTSE Russell 26

27 Multi Dealer Pricing Methodology Price Challenge Policy FTSE TMX has an established policy for clients to challenge the price of any fixed income security which has been derived through the multi dealer pricing methodology Price challenge can be sent to FTSE TMX will notify all submitters for the issue(s) in question to review their pricing contributions FTSE TMX does not require feedback from the dealers in response to any challenge Any updated pricing levels (if applicable) will be reflected in the future quote contributions Clients challenging a price will receive a confirmation that FTSE TMX has challenged the respective contributors All challenges are anonymized FTSE Russell 27

28 Appendix Regulatory Changes in Index Landscape FTSE Russell 28

29 Regulatory Response FCA legislation via MAR (8) in 2013 Initially targeted at LIBOR, informed by Wheatley review Subsequently extended to WM/Reuters 4pm fix, ISDAfix (ICE Swap Rate), ICE Brent, LBMA gold price, LBMA Silver price, SONIA, RONIA IOSCO Principles for Financial Benchmarks in 2014 Sets out recommended practices for administrators Administrators required to produce an annual statement of compliance European regulation on indices used as benchmarks in financial instruments and financial contracts in 2018 FTSE Russell 29

30 IOSCO Principles (2014) Governance 1. Overall responsibility of the administrator 2. Oversight of third parties 3. Conflicts of interest for administrators 4. Control framework for administrators 5. Internal oversight Quality of the benchmark 6. Benchmark design 7. Data sufficiency 8. Hierarchy of data inputs 9. Transparency of benchmark determination 10. Periodic review FTSE Russell 30

31 IOSCO Principles (cont.) Quality of the methodology 11. Content of the methodology 12. Changes to the methodology 13. Transition 14. Submitter code of conduct 15. Internal controls over data collection Accountability 16. Complaints procedure 17. Audits 18. Audit trail 19. Cooperation with regulatory authorities FTSE Russell 31

32 European Regulation of Indices used as Benchmarks Applies from 1 January 2018 Index means any figure: Published or made available to the public Regularly determined by application. of a formula or assessment Determination made on the basis of the value of one or more underlying assets (or prices, quotes, surveys) Benchmark means any index by reference to which: Amount payable under a financial instrument or contract is determined Value of a financial instrument is determined An index used to measure the performance of an investment fund FTSE Russell 32

33 EU-based Administrators Authorisation and registration Authorisation Required if administrator provides indices used as benchmarks Registration If a supervised entity other than an administrator that does not provide critical benchmarks If only provide non-significant benchmarks Register maintained by ESMA Authorised and registered administrators FTSE Russell 33

34 Third Country Administrators Equivalence, recognition and endorsement Equivalence Administrator authorised/registered in 3 rd country with equivalent requirements; IOSCO compliance Provision for specific administrators/benchmarks Recognition Administrator recognised by competent authority of a member state; assessed IOSCO compliance statement Endorsement An administrator in the EU can endorse a benchmark or family of benchmarks ESMA register Lists individual benchmarks or combinations thereof FTSE Russell 34

35 Timetable Entered into force in mid 2016 Publication in official journal Date of application 18 months later 1 January 2018 Critical benchmarks applied immediately Administrators to seek authorisation or registration within 24 months of application Competent authority can register certain administrators Transitional provisions for EU administrators Allow continued introduction of new benchmarks and uses FTSE Russell 35

36 Appendix Implications for Administrators FTSE Russell 36

37 Organisational Requirements Governance Robust, clear structure Conflicts of interest Conflicts to be published or disclosed Mitigate (independent oversight), manage or cease production Oversight function (e.g. separate committee) Methodology definition, change process Control framework Third parties Audits FTSE Russell 37

38 Organisational Requirements (cont.) Control framework Compliance with regulation Management of operational risk, BCP and DR Adherence to contributor code of conduct Accountability framework Compliance function, audits Record keeping Inputs, judgements, complaints Complaints handling procedure Published, timely, independence FTSE Russell 38

39 Organisational Requirements (cont.) Outsourcing Administrator remains responsible Input data (values or prices of underlying assets) Sufficient to accurately and reliably represent the market Methodology Robust and reliable; transparency Code of conduct for submitters What, who; suspicions, conflicts Governance and controls for supervised contributors Conflicts, controls, training Cessation policy FTSE Russell 39

40 Benchmark Requirements Identify critical and significant benchmarks Decide whether to avail of certain exemptions for significant and non-significant benchmarks Publish reasons if so Meet benchmark requirements Publish methodology and review procedures Publish benchmark statement Monitor input data Contingency arrangements Implement code of conduct for contributors Contributions defined as input data which is not readily available to the administrator Prices, values, quotations FTSE Russell 40

41 Benchmark Requirements Published Benchmark Statement Define the market or economic reality Clearly and unambiguously identify elements of discretion Provide notice that external factors may necessitate changes or cessation Contains at a minimum: Definitions of key terms Criteria and procedures used in determination Controls and rules governing discretion or judgement Procedures in times of market stress Procedures for dealing with errors Identification of potential limitations Operation in illiquid or fragmented markets FTSE Russell 41

42 Important information 2017 London Stock Exchange Group plc and its applicable group undertakings (the LSE Group ). The LSE Group includes (1) FTSE International Limited ( FTSE ), (2) Frank Russell Company ( Russell ), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, FTSE TMX ) and (4) MTSNext Limited ( MTSNext ). All rights reserved. FTSE Russell is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. FTSE, Russell, FTSE Russell MTS, FTSE TMX, FTSE4Good and ICB and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the Indexes for any particular purpose to which they might be put. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors. Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. This publication may contain forward-looking statements. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. Any forward-looking statements speak only as of the date they are made and no member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking statements. FTSE Russell 42